Critique of the method used in the analysis
Macroeconomic uncertainty
The analysis fails to take into consideration the fact that the macroeconomic environment is never perfect, but it changes in unpredictable ways. Such changes may in turn affect the interest rates positively or negatively, thereby having an effect on the economy overly. In essence, the values of the 13 companies are likely to be affected by the changes experienced in the macroeconomic environment (Oxelheim, 2003, p. 36).
Valuation
Billabong Asset Management, as an interested investor company, is required to perform an extensive valuation of the companies it wishes to invest in to be able to ascertain whether such a move with respect to the individual companies would pay off (Reilly, 2010, p. 60). The analysis conducted on the 13 companies that Billabong seeks to invest in is extensive and provides useful trends and information that can be relied upon in making investment decisions. The daily price data for each of the 13 companies run from 2005 to 2013, which is close to eight years of analysis on the performance of each of the companies. This is good for Billabong because it will provide it with adequate details on each of the 13 companies, especially details on their business performance.
Bias
Although the 13 companies that Billabong may wish to invest in have been identified, the analysis does not indicate the reason for selecting the said companies. This could be a result of bias on the part of the analysts who conducted the initial investigation. It could have been done with the intent of benefiting an individual or group of individuals and not necessarily taking Billabong’s interests into consideration. This could end up affecting the company’s finances, particularly where returns are minimal (Scott, Stumpp & Xu, 1999, p. 49).
The Portfolio construction is required to satisfy targeted annualized rates of return
Billabong must employ MVA over the seven years, beginning 2005 to 2013, of the compounded yearly information or return data to solve the stock weights. This will enable the company to construct the requisite portfolio for the coming one-year holding period. MVO can be used to ascertain the security weights contained in the little basket of stocks while basing on the historical income and covariance (Durr, Eaton & Broker, 2009, p. 57). While doing this, the weight contained in a single stock should be limited to 20% of the portfolio. This will see the average yearly excess returns range from 6% to 10%; that is, for the long-only smallest amount variance small-basket portfolios. The percentage index is relative to the comparatively bigger SRI funds. This is relative to the small-basket funds.
From these results, the calculations are likely to depict an enhanced portfolio performance to cover the entire period under analysis. The results, on the other hand, rest on the supposition that relationships from the past, touching on the individual assets along with the asset classes, will hold through into the future. The period under which the investment returns have been collected, will, in turn, affect the marks of comparative analyses to be performed in the future.
From past knowledge, it is obvious that limitations of this type of portfolio analysis are equally important with regard to its indications. It is worth suggesting that Billabong should consider using the LOMVSBP strategy in a section of the investment holdings of the company to construct various MVP small-basket portfolios from the various larger SRI funds (Durr, Eaton & Broker, 2009, p. 57).
List of References
Durr, D, Eaton, DH & Broker, T 2009, ‘Outracing the market: A NASCAR portfolio as a test case of returns and diversification’, Journal of Applied Economics & Policy, vol. 28, no. 1, pp. 57-68.
Oxelheim, L 2003, ‘Macroeconomic variables and corporate performance’, Financial Analysts Journal, vol. 59, no. 4, pp. 36-50.
Reilly, RF 2010, ‘Valuation Analyst Guidelines Related to Bankruptcy Expert Reports and Testimony’, American Bankruptcy Institute Journal, vol. 29, no. 8, pp. 60-63.
Scott, J, Stumpp, M & Xu, P 1999, ‘Behavioral bias, valuation, and active management’, Financial Analysts Journal, vol. 55, no. 4, pp. 49-57.